The falling interest rates on fixed deposits have affected everyone but it has affected senior citizen the most as most of the senior citizens invest their savings in bank fixed deposits where they get interest at periodical interval to meet their day today expenses. Since the interest rates have been coming down for some time consistently, they have been receiving lower in hand money over the years with having to meet the increased costs of day today needs. As the ability to take risk comes down substantially for them post retirement and with shorter time horizon to invest, they can not risk the money by investing in equity as an asset class, which helps you guards you against inflation and earn better returns. In this article I will discuss some of the products/investment avenues which can help you shield you against lower deposit rates.
Pradhan Mantri Vaya Vandana Yojana
This scheme is available till 3rd May 2018. Under this scheme, which is managed by life insurance corporation of India (LIC), you get a guaranteed annuity in the form of periodical payments @ 8% annual guaranteed pension for 10 years. This scheme can be purchased online as well as offline by any Individual above 60 years but not an HUF. There is a ceiling of maximum pension which a family as a whole can get is capped at Rs.5,000 per month and accordingly the money one can invest. The family for this purpose will comprise of pensioner, his/her spouse and dependants. This is basically a pension plan with return of capital sum earning you an annuity regularly maximum upto Rs. 5000/- per month. Under this scheme you can opt to receive the annuity at monthly, quarterly, half yearly or yearly interval. Depending on payment frequency chosen by you, you need to deposit the money with Life Insurance Corporation of India. Under this scheme. you are normally not allowed to withdraw the purchase price before completion of 10 years but in circumstances like terminal illness or critical illness of the spouse or the self, you are allowed to withdraw the money with deduction of 2% of the capital sum. However on completion of the term of 10 years you will get back the full price which is not taxable in your hand at the time of the receipt. Please note that unlike the Senior Citizen Savings Scheme you do not get any tax benefit for deposits made in the account. The Annuity received is taxable in your hand at the slab rate applicable to you. In my opinion this is an excellent scheme as it offers guaranteed payment @ 8% for next 10 years especially when the interest rates are on downslide and may further come down.
Senior Citizen Savings Scheme (SCSS)
If you have completed 60 years of age you can open this account with post office or designated banks either in your individual name or jointly with your spouse. Only a spouse can become a joint holder under this scheme. Your spouse can also individually open an account under this scheme provided has already completed 60 years of age. Like Varisht Vaya Vandana Yojana account cannot be opened under this scheme in the name of HUF. Likewise a non resident Indian (NRI) or person of Indian origin (PIO) are not eligible to invest under this scheme.
In case you have retired on superannuating or taken voluntary retirement then you can invest in the scheme provided you have completed 55 years of age at the time of your retirement. If you are retired personnel of defence services, the restriction on age for opening the account does not apply. In such cases you need to open this account within a period of one month from the date of receipt of your retirement money with proof of disbursal. In these cases the money to be invested under this scheme should be the money received as retirement benefits under the terms of such retirement. No such restriction applies for people who have completed 60 years of age. They can deposit any money under this scheme.
An amount upto Rs. 15 lakhs can be invested in one name either at one go or in piecemeal. Since the eligibility under this scheme is considered for the first holder, it is not necessary that the spouse should also have completed the age of 60 year for joining as joint holder. The account opened under this scheme is for a period of five years initially and can be extended for another period of three years. In case you want to withdraw the money before completion of the term of five years, you can do so only after completion of one year but with a penalty. It is pertinent to note that as per the scheme, no part of deposit can be withdrawn during the first year of its operation. Therefore, it is advisable that you assess your financial requirement including for contingency for the first year and keep aside the same. Interest under this scheme is decided every quarter by the government in advance. Presently, the rate of interest for this scheme is 8.3 percent. The scheme pays you interest quarterly. The interest earned on this scheme is fully taxable in your hand and 10 percent TDS will be applicable at the time of payment of interest if the interest for the whole year is more than Rs 10,000 in a year. However, you can submit form no 15H in case you have completed 60 years of age or 15 G if you have not completed 60 years of your age to get interest without deduction of tax. This is a good scheme as even the rates are coming down but still are far higher than the one offered on your fixed deposits which is between 6% to 7%. The money invested under this scheme qualifies for deduction upto Rs. 1.50 lakhs, under Section 80 C as for senior citizens which is very good considering the fact that a very few avenues are available for claiming deduction under Section 80C.
National Savings Certificates
The third product in the category is NSC, which have a tenure of five years. Moreover the interest which you will earn on this investment is not subject to any change in future and is fixed when you buy the certificates. For the NSC issued till 30th September, 2017 the rate of interest is 7.80% and is fixed for the entire tenure of five years of the certificates. So this guards you against the future changes in the interest rates which applies on other investments like Senior Citizen Saving scheme, Public Provident Fund etc.. So in the present interest rate cycle where the rates are expected to come down, it makes sense for you to lock you interest rate for the next five years. There is no limit upto which you can invest in NSC. Moreover You can avail credit facility against the security of the NSC in case you need monty either by way of loan or as overdraft facility against security of the NSCs. Like SCSS the investments made in NSC qualifies for deduction under Section 80C.
Monthly Income Plans of Mutual Funds
In addition to the traditional investment avenues discussed above senior citizens can invest in monthly income plans (MIP) offered by mutualfunds houses where a very small part of the money, around 15to 20% is invested in equity and the balance is invested in debt products. Due to investments in equity the schemes are able to better their overall returns as compared to pure debt products and ensuring the safety of the capital at the same time. Though the name of the schemes are generally monthly income plans but the fund houses do not necessarily distribute or pay the unit holders on monthly basis. If you want monthly money you can opt for Systematic Withdrawal Plans (SWP) so as to ensure you get the money need on monthly basis. The returns generated by the MIP are not fixed in advanced like the other products discussed above. The returns generated would depend largely on the interest rate prevailing and changes in the interest rates. The average returns generated by these schemes are 8.95% 10.15% and 10.35% returns for last one, three and five years respectively as a category.
The money which is lying in your saving bank account and earns 4% interest can be shifted to liquid fund where the same can be withdrawn at 24 hours either fully or in part while earning returns even better than your fixed deposits. So any surplus money in your saving bank account can be shifted to liquid funds of mutual funds and thus improving your overall returns. If you are technology savvy and can manage it online investing and redeeming money in liquid funds is hassle free.
I am sure combinations of these products will help you shield not only the senior citizen but also other investors to shield themselves against falling bank fixed deposit rate.
Read More post By [Balwant Jain]
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)
By Balwant Jain (CA, CS and CFP)The author is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. Views are personal., He can be reached at firstname.lastname@example.org and @jainbalwant